Every morning I come into work and set about reading the morning news. Whether it is the Wall Street Journal online, MarketWatch News, or Bloomberg.com, I peruse the stock market and business news to see what kind of rollercoaster the day will be. One thing that strikes me as ironic is how the daily stock market futures article gets my blood racing, at the same time that I write it off completely.
Speculators and hedgers enter into stock futures contracts in order to hedge against an existing asset or liability exposure, or often, to profit off of the direction of the stock market. To the parties of the futures contract there is either a payoff, or amount owed, depending on the subsequent direction of the stock market. Stock futures prices indicate if investors on the whole believe that the stock market will be higher or lower. What investors believe will happen changes by the second, as evidenced by the fluctuating stock market index futures.
Stock market futures indicate what direction stocks will go at the open of the market. But this is often then extrapolated into the general investing world as the tell-tale sign of what is to come for the remainder of the day and into the near future, many times turning out to be incorrect. If you come into the office every morning, every Monday through Friday of your life and read these articles, you can’t help but see the fickleness of the investors. One day the market is sure to drop into the abyss, other days it is off to the races. And no matter what is predicted, the journalist writing the article can always find some money manager somewhere to agree with what the stock futures may predict and give his or her reason for that.
Day after day the articles regarding stock futures are always the same, in that they always change. This is not to say that long-term, large macroeconomic forces do not affect the market, they most certainly do. But as a long-term investor it is my job to look beyond the day-to-day fluctuations, plan for broader market swings, and stay grounded, not letting emotions take over. However, the sentient being that I am makes this difficult, as I worry about my client’s money, emotions, and financial needs. So the article of the day, whether good or bad, gets my heart pounding a little, even though I realize its relevance is small in the big picture.
This represents to me perfectly what is so inherently frustrating about the stock market. Day to day the movement of stocks is uncertain, but you feel confident based on the news of the day of how stocks will move. You are sure you should be buying. But the next day the news leads you to be sure that you should be selling. Your emotions are high. Logically, academically, statistically, you know that the daily, weekly and monthly predictions are irrelevant and that the long-term outlook is what will have the greater impact on you financially if you are a well-diversified long-term investor. So if you feel unsettled or excited by the daily news, read for interest or understanding, then close the web browser and choose not to make sweeping changes to your portfolio that day.
Harli L. Palme, CFP®